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MUMBAI: Markets, which rose a little over 2% in January, could have climbed higher had domestic institutions not sold shares worth 16,750 crore, a record for a single month, in contrast to FIIs, who invested 22,240 crore. The sales by some of these entities, market experts said, were undertaken with an eye on government divestments in select PSUs and to meet redemption pressures from domestic investors. The government has set a divestment target of 30,000 crore in the current fiscal year; it has, so far, raised 9,000 crore, including its divestment in OIL.

Local insurers, led by Life Insurance Corporation, are believed to have sold a sizeable quantity of their holdings in January to ensure the government's divestment programme succeeds. Mutual fund accounted for 28% of DII sales in January. Market experts said much of the remaining sales were by institutions wanting to build up a corpus to invest in offers for sale by PSU behemoths like Oil India, NTPC and BHEL. "There's no data to give a breakup of how much insurers sold, but we can reasonably assume this was to create a kitty for the forthcoming OFS," said K Ramanathan, chief investment officer, ING Mutual Fund.

He said redemption pressures from retail investors, who invested when the Sensex peaked around 21,000 five years ago forced equity mutual funds to offload holdings in many companies.

Some of these investors could return after the Budget later this month if the government incentivises investments in markets. In the Budget for FY13, tax benefits were announced for investments up to 50,000 in stocks through mutual funds by those with annual income of below 10 lakh. "We expect a reversal in fund flows from retail investors as the government could announce investment schemes linked to mutual funds," said Sankaran Naren, chief investment officer, ICICI Prudential Mutual Fund. Naren said institutions could have sold their holdings to line up funds for purchasing PSU shares or in qualified institutional placements.

LIC is said to have stepped up share sales in L&T and M&M to bid for shares in Oil India - whose OFS was held on Friday - NTPC and Bhel. On Thursday, Axis Bank said it had successfully closed the largest equity QIP programme in the country worth over 4,726 crore, which saw participation from pension funds, insurers and domestic mutual funds. Apart from the QIP, the private lender made a preferential allotment worth 811.47 crore to five entities - LIC, General Insurance, The New India Assurance, National Insurance and United India Insurance, according to a regulatory filing.